Innovation in the Pharmaceutical Industry: The Process of Drug Discovery and Development - Innovation and Marketing in the Pharmaceutical Industry - page 61

relations, have essentially become effi cient vehicles for drug development and
market access. They offer synergies to both public sector institutions and biotech
fi rms, the majority of which may lack the requisite assets to carry drug discoveries
to commercialization. In the absence of steady cash streams, the long horizon to
market launch places biotech fi rms in a particularly vulnerable position to sustain
operations and highlights the likely benefi ts of their partnerships with the incum-
bent large pharmaceutical fi rms.
The value of large pharmaceutical fi rms' downstream assets (manufacturing,
marketing, sales) can be crucial to biotech fi rms working in the same or similar
therapeutic areas. Most of the dominant incumbents have developed valuable fi rm-
specifi c competencies and market familiarity regarding certain types of disease. The
competitive advantage conferred by such specifi c, in-depth knowledge could be
strengthened with the ties between the fi rm's drug representatives and the physi-
cians specializing in certain therapeutic areas. The repeated visits of a pharmaceuti-
cal fi rm's sales representatives with dedicated healthcare specialists may foster
better rapport and increased credibility as the two sides get to capitalize on highly
relevant pools of idiosyncratic, specialized knowledge. Good personal relationships
with key decision makers in healthcare, reinforced with compelling sales presenta-
tions by the fi rm's drug representatives, can become an inimitable co-specialized
asset for the fi rm. For the dominant pharmaceutical fi rms, this can translate into
considerable downstream leverage. It also provides an option for signifi cant innova-
tion rents to be extracted through target-specifi c alliances.
The leadership role of the established and profi table pharmaceutical fi rms in
commercializing technological breakthroughs (pioneer drugs) and market break-
throughs (follow-on and me-too drugs) has been documented empirically in Sorescu
et al. (2003). The fi ndings show that such fi rms launch more new drugs, and that
being backed up by such a fi rm boosts the value of newly released medications as
measured by their net present value. The increase in market value is particularly
pronounced in the case of pioneer drugs. Yet, as Sorescu's et al. (2003) study had no
controls for alliance activity, follow-up work could illuminate the share of drug
innovations that large fi rms have sourced from partnerships. Such scrutiny can shed
light on the contribution of strategic collaboration to both partners, essentially mea-
suring the returns from alliance participation.
Alliance modes for large pharmaceutical fi rms . In a study of 889 strategic alliances
between incumbent pharmaceutical fi rms and new biotech companies, Rothaermel
( 2001a ) fi nds evidence that the large pharmaceutical fi rms prefer exploitation alli-
ances (alliances that leverage their downstream assets, for example in the areas of
clinical trials, FDA regulatory management, marketing, sales) to exploration alli-
ances (alliances that build their upstream, technology-based competencies—e.g.,
discovery, R&D). The preference for exploitation alliances can be explained by
effi ciency considerations: exploitation alliances can leverage the already existing
specialized downstream assets of large pharmaceutical fi rms, help them capture sig-
nifi cant amounts of new revenue, as well as sustain their reputation as innovators,
while limiting the amount of extra risk involved.